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Oil Prices Struggle To Move Beyond $40

Oil Prices Struggle To Move Beyond $40

First of all, we take a quick look at some of the critical figures and data in the energy markets this week, in which we see that the oil rig count has stabilized and actually increased with one rig. The gas rig count however has declined with 5 rigs. 

(Click to enlarge)

(Click to enlarge)

Chart of the Week

• Coal producers have been under relentless pressure from falling demand, depressed prices, and environmental regulation. A warm winter added more pain to the sector. 

• In recent years, coal stockpiles sitting at utility yards have surged, as power plants burn less coal. With a surplus of coal on hand, fewer and fewer rail cars are making their way from the mines to the power plant. An average of just 94,000 weekly carloads were logged between September and December 2015, 22 percent lower than average.

• At the end of 2015, coal stockpiles rose to 195 million tons, the highest level in more than three years, and the highest year-end inventory for at least a quarter century. Between September and December, utilities added more than 40 million tons of coal, the strongest build in more than 15 years. That is even more glaring considering the fact that coal stockpiles typically fall as colder months set in. 

• The decline for coal producers appears to be structural, with little prospect of a rebound in sight. A growing number of large banks are ruling out future investments in coal. Related: New Wind Turbines Taller Than The Empire State Building

Market Movers

Petronas received a three-month extension on its application to build a massive LNG export terminal on the Pacific Coast of British Columbia. The $28 billion Pacific NorthWest LNG project has suffered repeated delays, and still faces regulatory scrutiny along with opposition from First Nations tribes and environmentalists.

Noble Energy (NYSE: NBL) and Delek Group (OTCPK: DGRLY) are hoping to raise $3.5 to $4 billion to help develop the Leviathan, a huge natural gas discovery off the coast of Israel. The project expects to export 10 billion cubic meters of natural gas per year when it comes online, but has faced delays because of regulatory scrutiny from the Israeli government.

Eni (NYSE: E) announced $14 billion in cuts to spending and asset sales on March 18. Over the next four years the Italian oil giant will sell off 7 billion euros in assets, most of which will come from new oil and gas discoveries. Another 6 billion euros will be cut from spending.

Tuesday March 22, 2016

Oil prices have held gains in recent days after rising to $40 per barrel, but the rally has struggled to move beyond that threshold. Terrorist attacks in Brussels on March 22, which early reports say killed more than 30 people, have spooked the markets as investors moved assets to safe havens. Oil prices were flat in early trading on Tuesday.

Not all OPEC members will attend Doha meeting. With much of the energy world holding its breath for the production freeze meeting in Doha in April, OPEC’s Secretary-General said that not all members will attend the summit. “I hear that about 15 countries are going to attend. Maybe some of our members will not attend. Some of non-OPEC members will not attend but 15 or 16 countries are major producers and are not a bad number,” Secretary-General Abdallah Salem el-Badri said on March 21 in Vienna. The meeting is expected to cover the details of the production freeze, which Iran has already said it will not adhere to.

Venezuela to import U.S. crude. Venezuela’s state-owned oil company PDVSA is slated to receive a shipment of U.S. crude oil, which will be delivered by PetroChina in early April, according to Reuters. Separately, PDVSA is expected to purchase 8 million barrels of U.S. and Nigerian crude oil. The Venezuelan company has begun importing light oil to dilute its extra heavy oil, a necessary step to help process it. PDVSA could end up importing around 120,000 barrels per day in the second quarter.

North Dakota oil-related litigation surges. In the Bakken, drilling activity has plummeted and production is starting to decline, but there is one thing that is rising quickly: litigation. With the collapse in oil prices, landowners are not receiving royalty payments on their mineral leases, and oilfield service contractors are sometimes going unpaid from drillers. In 2015, North Dakota saw a record high of 9,305 civil cases, many of which are connected to the energy downturn. “Companies that were once willing to let some time go on collecting accounts receivable for services are now filing well liens on a daily basis and trying to collect their money before the debtor goes insolvent,” North Dakota attorney Josh Swanson told the Associated Press. “It’s all about everyone trying to get paid and working out deals to stay in operation.” Related: What Happens When Oil Hits $50?

BP (NYSE: BP) and Statoil (NYSE: STO) withdraw staff from Algeria. BP and Statoil temporarily withdrew some staff from their natural gas plants in Algeria following rocket attacks from Al Qaeda. No injuries or damage to the facilities were reported. Algeria sources most of its export revenue from natural gas exports, and the two facilities that BP and Statoil operate, along with the state-owned firm Sonatrach, produce a sizable portion of the country’s gas output.

New LNG shipments. Some news in LNG markets arrived this week. Chevron’s (NYSE: CVX) Gorgon LNG shipped its first cargo in recent days. Also, the Swiss petrochemical company Ineos Group Holdings SA is set to receive the first American shipment of natural gas liquids to Europe. The shipment is carrying ethane from the Marcellus Shale.

Standoff between Iraqi government and Kurds continues. Iraq posted significant oil export losses in February, owing to major pipeline disruptions for separate reasons. First, a key pipeline that travels from Iraq through Turkey to the Mediterranean port of Ceyhan was attacked and damaged, temporarily knocking off 600,000 barrels per day. That was repaired and exports resumed. But then, the North Oil Company, an Iraqi state-owned firm, cut off 150,000 barrels of supply, a move interpreted as Baghdad trying to put pressure on the Kurds. The Iraqi government and the Kurds are still at odds over who controls the oil that is exported through Turkey, which is linked to the two sides’ inability to come to a financial agreement. Iraq’s oil minister said on Tuesday that the throughput from North Oil Company will not resume until Baghdad and the Kurdish Regional Government finally reach an agreement. Writing on his Facebook page, oil minister Adel Abdul Mahdi said they either have to return to the old revenue sharing agreement or reach a new one.

Petrobras reports record loss. Brazil’s state-owned oil company Petrobras announced its largest ever quarterly loss on Monday. The embattled oil company lost 36.94 billion reais ($10.2 billion) in the fourth quarter, and nearly 50 percent larger than the same quarter last year, which was a record at the time. The result tipped Petrobras into a full-year loss for 2015. Petrobras also wrote off 49.75 billion reais ($13.79 billion) in assets, most of which was for oil fields. The news comes as Brazil has plunged into the worst political crisis in recent memory, as President Dilma Rousseff is facing pressure from protestors and corruption investigators that appears to be worsening by the day. Related: Supply Outages in OPEC Countries Push Up Oil Prices

Currency pegs in Gulf States should survive. A new report from Moody’s concludes that the currency pegs in Gulf State countries, including Saudi Arabia, should survive the oil price downturn. The oil-producers on the Arabian Peninsula have ample foreign exchange to defend their currencies, despite the crash in prices. The region is expected to post a collective fiscal deficit of $250 billion over the next two years due to the slump in oil prices, which has raised questions about the durability of the fixed exchange rates. To address the problem, Saudi Arabia is undertaking an austerity drive while also tapping the bond markets. Meanwhile, the countries also continue to draw down their foreign reserves at a rapid clip. "The GCC’s large foreign-currency reserves provide ample room to maintain pegged exchange-rate regimes for several years, even in an adverse oil price scenario," Moody’s analyst Mathias Angonin said on Monday in Dubai. "Changes to the current exchange-rate regimes are unlikely because the costs associated with one-off devaluations would outweigh the benefits."

Schlumberger (NYSE: SLB) CEO warns that oilfield service sector needs overhaul. One of the world’s largest oilfield service companies says that the sector needs to shift its business practices in order to rebound. Schlumberger’s CEO says that service companies need to work more closely with producers if real costs savings can be achieved. Typically, producers contract out different parts of a drilling project to an array of contractors, and the lack of coordination holds back development and innovation. The so-called efficiency gains achieved since 2014 are really just a temporarily result from stiff competition, and costs will rise again when oil prices rebound. In other words, according to Schlumberger, unless business practices change dramatically, the cost-savings reported over the past year or so are largely illusory.

By Evan Kelly of Oilprice.com

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Leave a comment
  • RGR on March 22 2016 said:
    Crude Oil averaged $30 between Jan 10 and Feb 15, with some obvious volatility. Oil has remained above $40 for only 5 days. Give it some time - jeesh.
  • BEaver LOve on March 22 2016 said:
    t boner pickens says $70 by May! I like that guy he has balls!

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